US EARLY MORNING: US index futures are up, Treasury yields are wider; contrarians are emerging, reports say; big retail focus this week, as well as continuing debt ceiling drama

OVERNIGHT: Asia-Pac stocks traded mixed following the subdued performance last Friday on Wall St where risk sentiment was hampered by a disappointing University of Michigan Survey and US debt ceiling concerns, while participants in the region brace for this week’s key economic releases including the latest Chinese activity data. Our APAC wrap is here. European equities start the week on a constructive footing, shrugging-off continuing angst around the looming US debt ceiling, as well as a likely run-off in Turkey’s Presidential elections, where the incumbent Erdogan has performed better than anticipated, though Turkish-related proxies have come under pressure. Data out of Germany showed wholesale prices falling 0.4% M/M, taking the annual rate to -0.5% Y/Y (prev. +2.0%). Over the weekend, ECB's de Guindos suggested that the cycle of rate hikes are in their final stretch, as a few of his colleagues did last week. ECB's Kazmir, however, leaned back against some of the more dovish chatter in recent days, stating that the central bank would need to raise rates for longer than previously thought in order to cap inflation. Our European cash open note is here.

US PRE-MARKETS: US equity futures are a little higher, and Treasury yields are a little higher too. The Dollar Index is slightly lower, with activity currencies seeing some upside. Crude futures trade around flat. Debt ceiling drama continues to linger, but President Biden says we should see progress in the next few days, with reports suggesting a meeting with Congressional leaders will take place on Tuesday, ahead of Biden’s visit to Japan (see below for more). Weekend reports have a contrarian feel, where some have become more bullish after the recent gloom (again, see below for more); additionally, earnings season has been a bit better than feared (albeit with a low bar of expectations), which is leading some to become more constructive about their future profits view (like Goldman, see below). The week ahead has a retail feel, with US retail sales data for April out on Tuesday, while we also get earnings updates from Walmart (WMT), Home Depot (HD) and Target (TGT), which could provide further sway into the economic growth narrative.

CONTRARIANS EMERGING: A WSJ report notes the bearish sentiment around US stocks – citing Bank of America recent monthly fund manager survey and the weekly survey from the American Association of Individual Investors – but says that amid the gloom, some are adding new equity longs as indices stall, and have reportedly been looking for bouts of volatility to put money back into stocks. And the FT writes that as human portfolio managers fret over the economic uncertainty and the health of US banks, algo driven funds have been buying stocks at one of the fastest rates in a decade in response to falling volatility, and Nomura says this has been the key to propping up the market as active managers sit on the side lines. Barron’s has also jumped into the contrarian camp, and discusses a potential break higher in US stocks, citing the CPI data which showed the tenth straight month of deceleration, while PPI is rising at the slowest rate now since early 2021.

CONSTRUCTIVE TECH VIEW: Technicians at Fundstrat argue that the SPX trend is still bullish, and they are looking for the SPX to a push above 4,200 this week, noting that dips have support between 4,080-4,090 region; the techs argue that the churn in equities continues, and while last week saw choppy consolidative trading, it did not do much to convince them that prices are headed sub-4,050 in the near-term. It also points to the Regional Banking indices (KBE, KRE) that despite trading near recent lows, have stabilised; if this sector falls beneath support levels, it could challenge the idea that stocks will rise above 4,200 before a significant decline. Fundstrat says that in the short term, there may be a test of the previous lows, with a possibility of briefly going below them, but the bigger picture centres on an approximately 100-point range for SPX that will have the most importance, with 4,154 being resistance and 4,050 as support. "It’s expected that Friday’s pullback should be buyable into the week, which will lead to a rally up to test and exceed 4,154 on its way to 4,200 and above," it says, "However, there should be strong resistance at 4,235-4,325.

EARNINGS SCORECARD: At the end of last week, aggregate S&P 500 earnings were -0.6%, according to Refinitiv data, with Discretionary (+55%), Industrials (+26%), Energy (+19%) and Financials (+8%) the only sectors posting profit growth; Materials (-22%), Utilities (-22%), and Health Care (-15%) were the laggards. Generally, analysts are accepting that earnings season thus far has been better than predicted, although the bar for expectations was low. Based on these results, GS is more confident in its prediction that the EPS for the year 2023 will be USD 224 (which would represent +1% growth). GS believes that the worst phase of negative earnings revisions is now over. That said, the bank still expects the EPS for 2024 to be USD 237, below the consensus view; GS says that expectations for profit margins remain too optimistic. The bank also acknowledges risks to its EPS view, mainly due to uncertainty in the banking sector. It anticipates real yields will increase, and the P/E multiples will decrease from 18x to 17x. If the P/E remains stable, GS says that could result in a 5% increase in its year-end target of 4,000 for the S&P 500.

DEBT CEILING LATEST: The US Treasury Friday said there was USD 88bln in extraordinary measures to use under its 34.1trln debt limit; that figure is down from USD 110bln in the previous week. Last week, a meeting between President Biden and Congressional leaders failed to break the impasse, but Biden thinks further talks will take place on Tuesday, and he said he remained optimistic on talks. Biden said talks were moving along, and we will know more about progress in the next couple of days. Deputy Treasury Secretary Adeyemo added that ongoing debt-ceiling negotiations were constructive between all parties, CNN said. The FT said the White House and Republicans were starting to shape a possible debt ceiling deal, with issues on the table narrowing, although any agreement was unlikely to be concluded before President Biden attends the G7 summit between May 19th-21st, but could take place after that. Washington Post reports that markets are not expecting a US default, but some companies are preparing; by selling short-term Treasury bills and corporate bonds maturing around June 1st, when the government might run out of cash, and buying safer money market funds even though they pay a lower return, in order to cover payrolls.

MS ON DEBT CEILING: Morgan Stanley’s chief economist Seth Carpenter notes that in the past, when the US government reached its debt limit, there was tension in the markets; Treasury bills became scarce, and their prices went up, except for those maturing around the deadline. The debt limit was eventually raised, but this time, MS thinks that the risks in the banking system could be higher. Volatility in the banking sector continues to be a concern for the bank, even though it is not expected to have an extreme impact on the US economy. One difference now is the existence of the Fed's reverse repo facility, which drains reserves from the banking system. As the debt limit deadline approaches, money funds may shift their holdings away from Treasury bills and into the reverse repo facility, further reducing reserves. This drain of reserves could amplify risks in the banking system, MS warns. The bank explains that the Treasury will need to issue more bills to replenish its General Account, and the increased supply could cause yield movements and further drain bank reserves. While the market has sorted things out in the past, the magnitude of yield movements this time could be larger due to the higher starting level, Carpenter writes. Funding market volatility adds to the risk, even in a scenario where the debt limit is eventually raised.












15 May 2023 - 09:00- Research Sheet- Source: Newsquawk

Subscribe Now to Newsquawk

Click here for a 1 week free trial

Newsquawk provides audio news and commentary for over 15,000professional traders and brokers worldwide. Services include: